Citation: 2011 TCC 317
Date: June 27, 2011
Dockets: 2009-2166(IT)G
2009-2165(IT)G
BETWEEN:
ANDREW UGRO,
KELLY UGRO,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. FACTS
[1]
The Appellants are
spouses of one another.
[2]
The Appellants operated
a graphic design business under the name of Hub Media. (The business of
Hub Media is hereinafter referred to as the “Business”).
[3]
Hub Media provides
design and delivery of printed material, advertising, display and web-marketing
materials to customers.
[4]
From 1995 to 2001, the
Appellant, Andrew Ugro, operated Hub Media as a proprietorship.
[5]
In 2002, the Appellants
began to operate Hub Media as a partnership (the “Partnership”).
[6]
The Minister of
National Revenue (the “Minister”) maintained that the Appellants or the
Partnership had the following amount of income:
(a) in
2001, Andrew Ugro had billings of $56,648.70, cost of goods sold of $4,508.69
and expenses of $19,488.62;
(b) in
2002, the Partnership had billings of $365,626.82, cost of goods sold of
$269,540.00 and expenses of $18,340.92;
(c) in
2003, the Partnership had billings of $225,784.47, cost of goods sold of
$155,456.91 and expenses of $24,804.06;
(d) in
2004, the Partnership had billings of $281,682.52, cost of goods sold of
$215,653.16 and expenses of $21,185.70;
(e) the
revised billings of the Business in 2001, 2002, 2003 and 2004 were calculated
by the Minister using bank deposits as set out in the Appellants’ ledger, plus
current accounts receivables, less closing accounts receivables, less taxes
collected for each respective year;
(f) the
Appellants claimed the entire amount expended for meals and entertainment
expenses of Hub Media in 2001, 2002, 2003 and 2004. The Minister maintains that
each of the Appellants were only entitled to claim 50 per cent of the meals and
entertainment.
[7]
The Appellants reported
the following income from Hub Media:
Year Andrew Ugro Kelly
Ugro
2001 $
9,302.83 $ 0
2002 $20,424.53 $20,424.53
2003 $17,152.71 $17,152.71
2004 $16,626.60 $16,626.60
2005 $16,684.06 $16,684.06
(Note: The Appellant, Andrew Ugro,
earned 100 per cent of the income from the Business in 2001 and each of
the Appellants earned 50 per cent of the income from the Business from 2002 to
2005).
[8]
The Minister maintained
that each of the Appellants failed to report the following additional income
from the Business:
Year Andrew Ugro Kelly
Ugro
2001 $
23,349.00 $ 0
2002 $
18,449.00 $ 18,449.00
2003 $
5,610.00 $ 5,610.00
2004 $
5,796.00 $ 5,796.00
2005 $
5,363.00 $ 5,636.00
[9]
The Minister
established in evidence that the Appellant, Andrew Ugro, failed to file his
income tax returns for his 2001 to 2005 taxation years before the statutory
deadlines in the Income Tax Act (the “Act”).
[10]
The Appellant, Andrew
Ugro, admitted that he filed his 2001 to 2004 income tax returns on or about
January 3, 2007 and that he late-filed his 2005 income tax return on
January 31, 2007.
[11]
The Minister maintained
that the Appellant, Kelly Ugro, failed to file her income tax returns for her
2002 to 2005 taxation years before the statutory deadlines in the Act.
[12]
The Minister maintained
that the Appellant, Kelly Ugro, filed her 2002 to 2004 income tax returns on or
about January 3, 2007 and that she late-filed her 2005 income tax return on
January 31, 2007.
B. ISSUES
[13]
The issues to be
decided are whether:
(a) the
Minister properly included the Unreported Incomes in calculating the Appellants’
tax liability in the 2001, 2002, 2003, 2004 and 2005 taxation years;
(b) the
Minister properly disallowed 50 per cent of the meals and entertainment
expenses claimed by the Appellants in the 2001, 2002, 2003 and 2004 taxation
years; and
(c) the
Court is able to waive the penalty and interest calculated on the tax liability
assessed upon the Appellants’ 2001, 2002, 2003, 2004 and 2005 taxation years.
C. ANALYSIS AND DECISION
[14]
At the commencement of
the argument, Counsel for the Respondent said:
The Minister concedes that paragraph 15(l) [i.e.
of the Reply] is incorrect. It states there that the appellant claimed the
entire amount expended for meals and entertainment expenses of the business in
2001, 2002, 2003 and 2004. Based on information received in answers to
undertakings, it appears that only 50 percent of meals and entertainment for
those years were actually claimed. …
(Transcript,
Volume I, page 30, line 24 to page 31, line 5).
[15]
Counsel for the
Respondent said that the Minister agreed to the following reductions in income
for the Appellants:
Year Andrew Ugro Kelly
Ugro
2001 $421.48 $
0
2002 $383.42 $383.42
2003 $
0 $ 0
2004 $259.14 $259.14
2005 $
0 $ 0
Note: Counsel for the Respondent said that:
With respect to 2003, … the $760.10 is offset by an error in 2003 by
the Canada Revenue Agency in favour of the taxpayer in the amount of $5,886.73.
And so because of the error, which far exceeds the meals and entertainment, no
adjustment should be made for 2003.
(Transcript, Volume
I, page 31, line 22 to page 32, line 3)
(Note: Counsel for the Respondent said that there should be
no adjustment for 2005 because the Minister issued an arbitrary assessment
for that year.)
[16]
The Appellant, Andrew
Ugro, said that he had established a “formula” for determining his net
business income for 2001 and the net business income for the Partnership for
2002, 2003, 2004 and 2005.
[17]
In connection with the
“formula” or position adopted by the Appellants in determining their net
income for the years in question, I refer to the decision of Justice James
Russell of the Federal Court in Ugro v Minister of National Revenue,
2009 FC 826, 2010 D.T.C. 5002. In this case, Mr. Ugro had appealed to the
Federal Court in connection with the Minister’s decision under the Fairness
Legislation. In that case, Justice Russell said:
[88] At the heart of this application
lies a disagreement between the Applicant and CRA regarding a new system of
accounting that the Applicant claims to have developed himself because his
former accountant filed fraudulent returns on his behalf, or so he alleges.
This is not a dispute over the figures used by CRA. The Applicant says that his
accounting system provides a more accurate picture of this net business income
for tax purposes and he takes issue with the way that CRA has calculated gross
revenue, gross profit, and net business income. CRA's concern with the
Applicant's accounting system is focused on the method he uses to calculate his
revenue and gross profit.
[89] CRA's concerns over the Applicant's
system have been explained to him in numerous discussions and decisions. In the
end, he just disagrees with CRA's explanations and the results yielded by the
more traditional accounting methods that CRA has used to compute his net
business income for the years in question.
[90] As a result of this disagreement, the Applicant alleges
bad faith, lack of procedural fairness, bias, errors of law, errors of fact and
unreasonableness on the part of CRA, all of which have culminated in the second
fairness Decision currently under review.
[91] I have reviewed the written record carefully. I can see
that this protracted dispute has given rise to considerable frustration on both
sides. In the end, however, at least as far as the Applicant's requests for
credit adjustments are concerned, there is simply a disagreement over whether
the Applicant's self-invented accounting system yields an accurate result.
[92] CRA's objections and concerns with the Applicant's
system have been explained to him on numerous occasions and he has been given
every opportunity to demonstrate why his methodology, and the results it
yields, should be accepted by CRA.
[93] I can find no evidence of bad faith, bias, or lack of
procedural fairness on the part of CRA and the officers and officials who have
been involved with the Applicant and his accounting and tax problems.
[94] As regards the accuracy of his accounting methodology,
and the alleged inaccuracy of the methods employed by CRA to determine net
business income for the years in question, the Applicant offers his own
assertions and his reading of certain statutory provisions and case law.
However, on the central issue of how net business income is most accurately
calculated for the Applicant, he has not demonstrated that CRA has been wrong
in law, has overlooked any material fact, or has been unreasonable in its
calculations and conclusions.
(Note: The decision of Justice
Russell has been appealed to the Federal Court of Appeal. The appeal is held in
abeyance pending the final resolution of the Appellants’ related Tax Court of
Canada appeal.)
(Transcript, Volume I, page 28, line 24 to
page 29, line 2).
[18]
In the evidence before
me, officials of the Canada Revenue Agency (the “CRA”) have not accepted the
Appellant’s method of calculating his net income or the net income of the
Partnership.
[19]
In his argument, Counsel
for the Respondent said:
… the real issue that is before the
court today, [is] with respect to the two different systems of accounting, …
(Transcript, Volume II, page
69, lines 19 to 21).
[20]
Counsel for the
Respondent said:
It would be the position of the respondent
that the case law referred to by the appellant was largely irrelevant. To the
extent that he quoted relevant tax principles regarding sales, gross profit and
net profit, they support the Minister's position. What is relevant here is what
the appellant did do in his calculations of profit, and how he, in fact,
calculated them.
As we know, two chartered accountants originally did
his taxes and the taxpayer disagrees with how they did his taxes. His system
has been looked at by two auditors of the Canada Revenue Agency, two appeals
officers, two levels of fairness review, a Federal Court judge, and the
appellant's witness yesterday, another appeals officer from the Canada Revenue
Agency. And it's the appellant's position, who has no accounting training, that
his system works.
The appellant's alleged accounting system
can't work. He doesn't even do a proper accounting system, as we saw yesterday
when he showed his accounting
system on the overhead. He doesn't enter daily journal items
throughout the year and then have them posted to the general ledger. He makes
it at the end of the year. In effect, his disbursement is a clearing account. It's
simply a plug[ged] number. Every year, his system doesn't balance
and every year he puts in a plug[ged] number to balance his accounting, because
his system doesn't work.
In his argument, the appellant suggested the bank
account ledger could be used in default as a profit and loss statement. That's
patently absurd. Amounts withdrawn from the bank account might be drawings or
personal items. Then the expenses are paid out of the same bank account, that
you'd have double accounting of those expenses. His argument as to how his
system works shows that it doesn't, and what I'd like to do, just really
briefly, is take a look at the respondent's book of documents, tab 43. It would
be tab 43 and 17.
(Transcript, Volume II, page 70, line 7 to page
71, line 17)
[21]
At page 78 of the
transcript, Counsel for the Respondent quotes from the Canderel Ltd. v Her
Majesty the Queen, [1998] 1 S.C.R. 147 case:
Then
again at page 18, probably the most important paragraph for the purposes of
this case, paragraph 50 at page 18:
"It follows from
all of this that in calculating his or her income for a taxation year, the
taxpayer must adopt a method of computation which is not inconsistent with the Act,
or established rules of law, which is consistent with well-accepted business principles,
and which will yield an accurate picture of his or her income for that
year."
And
it's this next sentence that's key.
"In the simplest
cases, it will not even be necessary to resort formally to the various
well-accepted business principles as the simple formula by which revenues are
set against the expenditures incurred in earning them is always the basic
determinant."
That's all we're doing
here.
Paragraph 52 deals with onus with regard to computation
of income. So I just want to look at that really briefly. It says:
"Revenue Canada
is free to indicate its disapproval of the taxpayer's chosen method of
computation by means of assessment. We know from the Supreme Court of Canada
decision in Johnson, this court held that the onus is on the taxpayer in
the face of an assessment to establish that the factual findings on which the
assessment is based are wrong. However, to satisfy this onus, where the dispute
is over the appropriate method of computation, the taxpayer need only show that
his or her income was calculated in a manner consistent with the foregoing
paragraph; that is, that the figure attained was in conformity with the
then-existing legal framework and represents an accurate picture of his or her
financial position for the year in question."
And it's the
respondent's position that it's been the evidence before the court that two
chartered accountants didn't accept this method. He invented this method. The
CRA doesn't accept it. There is nothing that would indicate that it's allowed
by basic business principles. And we would also submit that it's been shown
that it doesn't accurately give a picture of his income.
Then, normally, if the taxpayer was able to satisfy
that onus, it would then shift to the Minister to prove either that the figure
does not constitute an accurate picture of income or that some other method of
computation would yield a more accurate picture.
And then in paragraph 53, this is the summary that
we've seen before of the six principles. And so it's relevant and important,
but I don't think we need to read through it, unless the court wishes us to do
that.
JUSTICE: Please go ahead. Please continue, I mean. Don't
read it. I've read it several times.
MR. SENKPIEL: And so then it's the respondent's
position that simply the accounting system that the appellant has put forward
not only hasn't been demonstrated to accord with business principles, it's been
seen to have a great deal of problems in it, and actually it ends up with quite
absurd results when actually put into play. And so it would be our position
that, aside from those amounts that the respondent has conceded, the appeal
should be dismissed.
(Transcript, Volume II, page 78, line 14 to page
81, line 5)
[22]
I have carefully
considered the Appellants’ evidence and arguments and the Court decisions to
which the Appellant, Andrew Ugro, referred and I have concluded that the
Minister was correct in his determination of the net income of Andrew Ugro, for
the 2001 taxation year and of the Partnership for the 2002 to 2005 taxation
years. I have, therefore, determined that the Appellants have not satisfied the
onus of establishing that the Minister’s calculations of net income for Andrew
Ugro in 2001 and the net income of the Partnership in 2002, 2003, 2004 and 2005
were incorrect.
Interest and Penalties
[23]
In their Notice of
Appeal, the Appellants asked the Court to set aside the decision by the CRA to
include penalties and interest.
[24]
With respect to the
accruing of interest, the Tax Court does not have the power to waive interest.
[25]
The penalties that were
imposed were late filing penalties since the tax returns for each Appellant
were late-filed. See paragraphs [9], [10], [11] and [12] above.
[26]
The
Tax Court does not have the authority to waive this type of penalty.
Costs
[27]
Counsel for the
Respondent suggested that the Court should impose costs. I hereby award the
following costs:
a)
costs payable by the
Appellant, Andrew Ugro, to the Respondent in the amount of $1,000.00;
b)
costs payable by the
Appellant, Kelly Ugro, to the Respondent in the amount of $1,000.00.
[28]
The Appeals are allowed
and the Minister is to make the adjustments referred to herein.
Signed at Vancouver, British Columbia, this 27th day of June 2011.
“L.M. Little”
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